The Stream Ran Dry but the Revenues Did Not: Developing a Drought Surcharge to Preserve Utility Revenues in Extreme Weather

The severe drought that affected the Southeastern United States in 2007 and 2008 forced many utilities to implement water use restrictions to preserve water supplies. Customers were forced to reduce or eliminate outdoor, discretionary usage of water. This consumption, mainly used for irrigation, was priced the highest for many utilities that charged for water using a conservation-oriented rate structure and the loss of this consumption led to significant revenue shortfalls. Since most of a utility’s costs are fixed, the loss of this revenue presented a great challenge and very few had a mechanism to help recover this lost revenue.Now that the water use restrictions have been removed or lightened, some utilities have considered and developed a mechanism that allows recovery of revenues in these extreme weather events. The Columbus Water Works (Georgia, “CWW”) was mandated by the State to reduce its water use by 10% as part of the State’s drought response plan. Luckily, through years of careful management and planning, the CWW was in a strong enough financial position to absorb the revenue shortfall this caused. After this initial occurrence, CWW decided to develop and implement a drought surcharge that could be used in response to future State-mandated water use restrictions. There were several major questions that had to be answered:1. What is the objective of the drought surcharge, water conservation or revenue recovery?2. Who should the surcharge apply to and what triggers its activation/termination?3. Are there political or affordability considerations?Working with Raftelis Financial Consultants, CWW established a goal of the implementing a surcharge on water rates that promotes water use reduction and mitigates revenue lost from the required reduction to consumption. A volumetric component had to be part of the surcharge to promote water conservation. Limiting the surcharge to high use and irrigation customers spreads the revenue requirement over a smaller base so the impact is higher; however, this targets the discretionary water use that the State is most easily eliminated during drought conditions. To reduce the burden on volumetric rates, consideration was also given to a minimal, flat charge included on every bill with the justification that the State has required the entire CWW system to reduce its demand and all users should share in the effort to maintain safe and reliable service.CWW determined that the most appropriate surcharge was one that was tied specifically to the State’s water use restrictions (both for effective duration and magnitude) and was only applied to its water volumetric rates. It is critical that the utility have a mechanism in place that can be implemented easily in the event of a severe drought that will help CWW meet the requirements of the State as well as mitigate the impacts of lost revenue. This mechanism is strictly tied to any State-mandated programs for water management and will not be left in place after such restrictions have been lifted. The State requirements are placed on all customers of the system and the drought surcharge has been designed to impact all customers equally to promote water conservation from the entire CWW community.